CAIA Topic 1: Professional Standards and Ethics Questions
With Complete Solutions
Recommendations Procedures for Compliance (Priority of
Transactions) Correct Answer - All firms should have in place
basic procedures that address conflicts created by personal
investing.
- Members should encourage their firms to adopt such
procedures if they have not.
The following areas should be included:
- Limited participation in equity IPOs.
- Restrictions on private placements. Strict limits should be
placed on employee acquisition of these securities, and proper
supervisory procedures should be in place. Participation in these
investments raises conflict of interest issues, similar to those of
IPOs.
- Establish blackout/restricted periods. Employees involved in
investment decision making should have blackout period before
trading for clients - no front running. The size of the firm and
the type of security should help dictate how severe the blackout
requirement should be.
- Reporting Requirements. Supervisors should establish
reporting procedures, including duplicate trade confirmations,
disclosure of personal holdings/beneficial ownership positions,
and preclearance procedures.
- Disclosure of policies. When requested, members must fully
disclose to investors their firm's personal trading policies.
,Recommended Procedure for Compliance (Material Nonpublic
Information) Correct Answer - Make reasonable efforts to
achieve public dissemination of the information.
- Encourage firms to adopt procedures to prevent misuse of
material nonpublic information.
- Use a "firewall" within the firm, with elements including the
following:
1. Substantially control relevant interdepartmental
communications, through a clearance area such as the
compliance or legal department.
2. Review employee trades - maintain "watch," "restricted," and
"rumor" lists.
3. Monitor and restrict proprietary trading while a firm is in
possession of material nonpublic information.
Recommended Procedures for Compliance - Firms (Knowledge
of the law) Correct Answer Members should encourage their
firms to do all of the following:
1. Develop and/or adopt a code of ethics
2. Make available to employees information that highlights
applicable laws and regulations.
3. Establish written procedures for reporting suspected
violations of laws, regulations or company policies.
, Recommended Procedures for Compliance - Members
(Knowledge of the Law) Correct Answer - Members should
have procedures to keep up with changes in applicable laws,
rules and regulations
- Continuous review of Compliance procedures
- Members should maintain current reference material for
employees to access
- Members should seek advice of counsel or their compliance
department when in doubt
- Members should document any violations when they
disassociate from prohibited activity
- No requirement to report to government authority, but
advisable or required in some instances
- Members are strongly encourage to report other members
violations of the Code and Standards
Recommended Procedures for Compliance (Additional
Compensation Arrangement) Correct Answer - Make an
immediate written report to the employer detailing proposed
compensation and services, if in addition to any compensation or
benefits provided by the employer.
- Details including any performance incentives should be
verified by the offering party.
With Complete Solutions
Recommendations Procedures for Compliance (Priority of
Transactions) Correct Answer - All firms should have in place
basic procedures that address conflicts created by personal
investing.
- Members should encourage their firms to adopt such
procedures if they have not.
The following areas should be included:
- Limited participation in equity IPOs.
- Restrictions on private placements. Strict limits should be
placed on employee acquisition of these securities, and proper
supervisory procedures should be in place. Participation in these
investments raises conflict of interest issues, similar to those of
IPOs.
- Establish blackout/restricted periods. Employees involved in
investment decision making should have blackout period before
trading for clients - no front running. The size of the firm and
the type of security should help dictate how severe the blackout
requirement should be.
- Reporting Requirements. Supervisors should establish
reporting procedures, including duplicate trade confirmations,
disclosure of personal holdings/beneficial ownership positions,
and preclearance procedures.
- Disclosure of policies. When requested, members must fully
disclose to investors their firm's personal trading policies.
,Recommended Procedure for Compliance (Material Nonpublic
Information) Correct Answer - Make reasonable efforts to
achieve public dissemination of the information.
- Encourage firms to adopt procedures to prevent misuse of
material nonpublic information.
- Use a "firewall" within the firm, with elements including the
following:
1. Substantially control relevant interdepartmental
communications, through a clearance area such as the
compliance or legal department.
2. Review employee trades - maintain "watch," "restricted," and
"rumor" lists.
3. Monitor and restrict proprietary trading while a firm is in
possession of material nonpublic information.
Recommended Procedures for Compliance - Firms (Knowledge
of the law) Correct Answer Members should encourage their
firms to do all of the following:
1. Develop and/or adopt a code of ethics
2. Make available to employees information that highlights
applicable laws and regulations.
3. Establish written procedures for reporting suspected
violations of laws, regulations or company policies.
, Recommended Procedures for Compliance - Members
(Knowledge of the Law) Correct Answer - Members should
have procedures to keep up with changes in applicable laws,
rules and regulations
- Continuous review of Compliance procedures
- Members should maintain current reference material for
employees to access
- Members should seek advice of counsel or their compliance
department when in doubt
- Members should document any violations when they
disassociate from prohibited activity
- No requirement to report to government authority, but
advisable or required in some instances
- Members are strongly encourage to report other members
violations of the Code and Standards
Recommended Procedures for Compliance (Additional
Compensation Arrangement) Correct Answer - Make an
immediate written report to the employer detailing proposed
compensation and services, if in addition to any compensation or
benefits provided by the employer.
- Details including any performance incentives should be
verified by the offering party.
